Pari Passu Investments

Update on Temporary Framework:

Number of approved and published covid-19 measures, as of 28 August 2020: 270*

Legal basis: Article 107(2)(b): 28; Article 107(3)(b): 228; Article 107(3)(c): 21

Four Member States have implemented 15 or more covid-19 measures each: Belgium, Czech Republic, Denmark, Italy & Poland.

– Average number of measures per Member State: 9.6

– Median number of measures per Member State: 12

– Mode number of measures per Member State: 6

* Excludes many amendments to previously notified measures


Public-private partnerships, leveraging private investment in infrastructure projects, using financial instruments to support new technologies are some of the more fashionable means by which the state intervenes in the economy. Grants are seen as undeserved gifts. Politicians want the private sector to assume risk so as to be more responsible. All this is good, but the problem is that projects in which public and private parties co-invest always raise State aid concerns. Even worse, the assessment of the existence and compatibility of any aid is more complex, as State aid may be granted to investors, the managers of the projects or even the projects themselves if they happen to be undertakings or involve undertakings.

The Commission, in case SA.55704 on the Dutch Venture Initiative, had to perform such a complex assessment in order to determine whether a multi-level project involving national and European partners had benefitted from State aid.

In September 2018, the Commission received a complaint claiming that the Netherlands had granted State aid to the following entities:

The “Dutch Venture Initiative” [DVI];

The private equity funds in which DVI invested;

The SMEs in which those private equity funds invested in turn;

“PPM Oost” to induce it to invest in DVI;

The “European Investment Fund” [EIF] which managed DVI [because allegedly the management fee was not market conform].

DVI is a “fund of funds”, jointly initiated by the Dutch Ministry of Economic Affairs and Climate Policy [MoE], the EIF and PPM Oost and financed by the EIF and the MoE through PPM Oost.

There are two DVI funds:

DVI I managing EUR 202.5 million [EUR 130 million from MoE, EUR 67.5 million from the EIF7 and the remaining EUR 5 million from the state-owned Brabant Development Company];

DVI II managing EUR 200 million [EUR 100 million from MoE and EUR 100 million from the EIF].

The EIF is the risk finance arm of the EU that supports SMEs. It is jointly owned by the EIB and the EU and some minor private shareholdings.

According to the decision “(14) the EIF has committed funds to the DVI funds […], acts as an advisor to the DVI funds and performs their fund management. In the DVI mandate, the DVI funds and the EIF agreed that the former would pay the EIF a management fee of 0.75% per annum, together with a carried interest of 10% for returns above a ‘hurdle’ rate of 5% internal rate of return (“IRR”).”

PPM Oost was a publicly owned development company with the MoE holding more than 50% of its shares.

“(16) PPM Oost is the channel which the Dutch State used to make its investments in DVI. An agreement between DVI and PPM Oost sets out the terms of the relationship between PPM Oost and the Dutch State. That agreement provides that the full risk of the DVI investments is borne by the Dutch State, i.e. the Dutch State will receive all potential profits of the investments and will bear also any potential losses. The agreement also provides that PPM Oost has to keep all proceeds from DVI on a separate account, which PPM Oost cannot use for any other purposes except the execution of DVI.”

“(17) PPM Oost has a facilitating role and provides support and services e.g. related to capital calls of DVI funds (after funds are committed, the capital calls relate to the actual transfer of funds). In this context, PPM Oost also has the right to nominate two members in the Steering Board of DVI and two members in its Investment Committee.”

“(18) The Dutch State remunerates PPM Oost for the DVI-related administrative tasks it performs. Concretely, the remuneration relates to e.g. personnel expenses and legal fees that PPM Oost incurs for its DVI-related work. An independent auditor validates a financial report which includes this compensation. […] one to two full-time equivalents (“FTE”) are allocated to the management of the DVI shareholding inside PPM Oost. As a result, the compensation fee amounted to EUR 51 000 in 2018, EUR 97 000 in 2017 and EUR 90 000 in 2016.”

As explained in the decision, DVI invested in 17 private equity funds which in turn invested in 153 SMEs. DVI always co-invested with other private investors on a pari passu basis. The participation of DVI in the funds varied between 5% to 30%.

[One of the conditions for a genuine pari passu investment is that the private participation must be “meaningful”. The Commission defines “meaningful” to be private participation of at least 30%. This implies that in the case of DVI, the private participation was always meaningful.]

The complainant contended that there was aid in the following arrangements and fees because they were not market conform:

  • the financial arrangement between the Dutch State and PPM Oost;
  • the investment made by PPM Oost into DVI;
  • the management fee paid by DVI to the EIF;
  • the investments made by DVI in private equity funds; and
  • the investments made by private equity funds funded by DVI into SMEs.

Existence of advantage

Non-conformity with market standards means that someone derives an undue advantage as a result of state intervention. For this reason, the Commission’s assessment focused on whether any of the entities involved derived any advantage that was funded by state resources. There was hardly any doubt that all potential beneficiaries were undertakings and that the measure was selective and likely to affect trade and distort competition.

“(57) An advantage, within the meaning of Article 107(1) TFEU, is any economic benefit that an undertaking could not have obtained under normal market conditions, that is to say in the absence of State intervention.”

Private equity funds and SMEs

With respect to private equity funds, the Commission found that “(58) DVI systematically assesses the risk/return characteristics of the investments and the track record of the investment managers before an investment decision is taken. DVI invests in private equity funds on a “pari passu” basis, i.e. at the same time and at the same conditions as independent private investors. This follows from the following considerations: First, the participation of DVI in the underlying private equity funds is generally modest […] with private co-investors owning the largest part of the underlying VC funds targeted by DVI. Second, the Commission notes that the EIF also validates the percentage of private co-investors in the VC funds targeted by DVI, and that the average private participation amounted to 67% (the private participation is thus economically significant). Third, DVI invests in underlying funds under the same conditions as private investors at the same time (i.e. in both the first and second closing of a single fund raising process) and from the same starting positions as external investors with no prior exposure to any private equity funds investees. When a transaction is carried out at the same time, under the same terms and conditions (and therefore with the same level of risk and rewards) as well as from the same starting positions by public bodies and private operators, it can be inferred that such a transaction is in line with market conditions.”

“(60) By extension, this logically implies that private equity funds cannot pass on any selective advantage to SMEs either. Indeed if the private equity funds are normal market vehicles, which generate risk-adjusted returns that are also acceptable to normal private investors, such private equity funds have to make investments which generate such market returns.”

European Investment Fund

Although the EIF is a European agency and has never been found to have received State aid, rather surprisingly the Commission still carried out a detailed assessment.

“(62) The Commission considers that in order to establish whether the fee structure of the EIF is in line with market conditions, it is appropriate to consider also central tendency measures (such as averages or medians) of fees of a set of comparable fund-of-funds. This information is contained in the Preqin Report submitted by the Dutch authorities.”

“(63) As for the annual management fee, the report contains a comprehensive overview of the management fees of fund-of-funds. DVI pays a fixed management fee (0.75%) to the EIF that is equal or lower than the median management fee of private equity fund-of-funds launched in 2013 (1%) (i.e. at the same time as DVI I was incorporated) and 2016 (0.75%) (i.e. at the same time as DVI II was incorporated). The Commission also notes that the fund size of DVI is relatively limited, which typically goes hand in hand with a higher annual management fee (expressed as a percentage of assets under management). […] For fund sizes around EUR 200 million, the average annual management fee is around 1%.”

“(64) Regarding the carried interest (10%), the Commission notes that a substantial percentage of recently started fund of funds (42% during 2016-2017) have carried interests of 10% or more.”

“(65) Regarding the hurdle rate of 5%, the Commission observes that higher hurdle rates in the market typically relate to investment funds investing in leveraged companies such as private equity and buyout funds (where the investments are thus riskier and the expected return is higher). For those funds, the hurdle rate generally amounts to 8%, which is more difficult to achieve for VC funds that focus on low-leverage SMEs (which are also reflected in the fee structure sent by the complainant). Sectoral data for 2016 show that VC funds generate an IRR with ca. 0% in the short term, between 10% and 12% in the mid-term and 5% over 10 years. These performances are lower than what other types of funds (such as private equity and buyout) achieve on average. Given these figures, the Commission considers that the EIF’s hurdle rate of 5% is adequate to incentivise the fund manager to adopt a mid-long term perspective so that it can reap the benefit of the carried interest rate consistently with the average performance of VC funds. Therefore, the Commission considers that the 5% hurdle rate is appropriate.”

“(66) The Commission further considers that this hurdle rate (5% compared to 8%) cannot be seen in isolation i.e. the entire fee structure has to be assessed to determine whether the remuneration can be considered market-conform. The Commission notes that the EIF fixed management fee (0.75%) is slightly below the median fixed management fee for fund-of-funds of a similar size (1%). With a carried interest of 10% and with a return of 8%, the total fee of EIF would have amounted to 1.05%, which is close to the median fixed management fee for funds of funds of similar size of 1% (and within the range of observations of fees). The Commission considers that the uncertainty that this IRR could have been reached when the management fees were set, underlines that the management fees were market conform.”

“(67) Based on the above, the Commission concludes that the overall fee structure of EIF (management fee, carried interest, hurdle rate) is in line with the fee structure of a comparable market operator of fund-of-funds. On this basis, the Commission considers that the remuneration of the EIF does not entail an economic advantage within the meaning of Article 107(1) TFEU.”

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With respect to the DVI itself, “(68) the Commission considers that the Dutch State invested in DVI at conditions that would also have been acceptable to private investors who would generally be interested in investing in a fund-of-funds. Indeed, DVI invests “pari passu” with other market operators in private equity funds […] and pays a market-conform remuneration for the management of the fund-of-funds structure to the EIF […] This ensures that the return of DVI is in line with the normal return of a fund-of-funds in the same underlying investments. The Commission also notes that the Netherlands duly took the fee structure of the EIF into account when DVI was set up and that DVI itself also systematically assesses the risk and return characteristics before making investment decisions. On this basis, the Commission concludes that the return that the Dutch State can expect on its DVI investment is that of a normal market economy operator.”

“(69) The Commission considers that the lack of appetite from certain investors (such as pension funds) to invest in DVI as a fund-of-funds does not prove the lack of market conformity of the investment. Such investors are restricted by the mandate they have in which underlying investments. Typically, such large investors typically can also invest directly in underlying funds and diversify the risk themselves (without needing to pay a management fee at fund of fund level). As to the argument that the Dutch State has other objectives than those of market economy operator (i.e. facilitate access to finance for SMEs), the Commission points out to the fact that the State aid rules only assess the effect of the investment and not its intention or objective. The Commission again notes that the Netherlands duly took the fee structure of the EIF into account when DVI was set up and that DVI itself also systematically assesses the risk and return characteristics before making investment decisions. […] Facilitating SME funding through DVI does not imply that the terms of the underlying investments are not market-conform or would not be done by a market economy operator. By investing pari-passu with private investors in private equity funds, DVI will be able to extract market-conform returns, which will then be passed on to its shareholders, including the MoE, while indirectly supporting SME financing.”

“(70) Given the above, the Commission concludes that the investment in DVI fund-of-funds structure by the Dutch State is market-conform. Therefore, this investment does not provide an economic advantage to DVI. The Commission also notes that the overall IRR that will be generated by the fund-of-funds could reach 10% to 15%”.

PPM Oost

Lastly, the Commission examined whether PPM Oost received any advantage. “(71) The Commission notes that the Netherlands submitted that the fee structure and the terms and conditions of the agreement with PPM Oost were assessed before entering into the agreement with PPM Oost and that the fees only reflect the direct costs PPM Oost itself incurs (therefore generally below what other service providers would charge). The Dutch authorities clarified that the agreement between PPM Oost and the Dutch State (i.e. MoE) is de facto neither a loan nor a subsidy. PPM Oost mainly provides administrative services and allows the Dutch State to invest in DVI’s equity through PPM Oost. PPM Oost keeps all the money of the DVI investments in a separate account and transfers all proceeds related to that investment to the Dutch State. Thus, PPM Oost does not retain any risk and does not receive any investment upside either. The Dutch State is therefore the economic owner of the investment in DVI.”

“(72) PPM Oost only receives compensation for the costs of the administrative services that it provides. The Commission notes that a financial report is drafted and validated each year by an auditor, which further ensures that PPM Oost is not overcompensated for these services. According to the 2018 financial report submitted by the Netherlands, the Commission notes that one to two FTEs are assigned inside PPM Oost to the management of DVI […]. Given the sums paid between 2016 and 2018, the Commission considers that the compensations paid by the MoE to PPM Oost are consistent with the number of FTEs. As the management of the shareholding requires from PPM Oost to take care of cash calls, to represent the MoE at DVI’s board meetings and other related administrative paperwork, the Commission is of the view that allocating one to two FTEs inside PPM Oost is proportionate to manage the Dutch State’s shareholding in DVI. In particular, now that both funds are actively running, the Commission views the allocation of one FTE in 2018 as appropriate. Thus, the Commission considers that there are no indications that PPM Oost is overcompensated by the MoE.”

“(73) Finally, the Commission does not consider the definition of a “pass-through vehicle” in the Risk Finance Guidelines to be relevant for PPM Oost. Both the Netherlands and the complainant refer to paragraph (39) of these guidelines. Given how the financial relationship between MoE, PPM Oost and DVI is structured and the market-conform nature of the MoE’s investment through PPM Oost into DVI, the circumstances referred to in the Risk Finance Guidelines definition of a ‘pass-through vehicle’ do not apply: no aid is transferred to either the underlying private equity funds or SMEs at the end of the investment chain.”

“(74) In view of these elements, the Commission concludes that PPM Oost (with regard to its role and the agreements concerning DVI) does not benefit from an economic advantage.”


“(75) On the basis of the above, the Commission has decided that the measures complained of, namely:

  1. a) The financial arrangement between the Dutch State and PPM Oost;
  2. b) The investment made by the Dutch State via PPM Oost into DVI;
  3. c) The management fee paid by DVI to the EIF;
  4. d) The investments made by DVI in private equity funds; and
  5. e) The investments made by private equity funds funded by DVI into SMEs,

do not constitute State aid within the meaning of Article 107(1) TFEU, as they do not confer an economic advantage on any undertaking.”

Photo by Ralph on Pixabay.



Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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